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Question 3

(5 points) Megan wants to buy a designer handbag and plans to earn the money babysitting.
Suppose the interest rate is 6% and she is willing to wait one year to purchase the bag. How
much babysitting money (to the nearest whole dollar) will she need to earn today to buy the bag
for $400 one year from now? (Enter just the number without the $ sign or a comma)
Answer for Question 3

Question 4
(10 points) Johnny and Darren both earn $100 working on their respective neighbors' big farms.
Johnny puts his $100 in the piggy bank that his parents gave him to encourage him to save.
Darren puts his money in a savings account his parents set up for him. The savings account pays
3% interest. They both take their money out after 5 years. How much more money does Darren
have than Johnny?

Question 5
(10 points) Don has just received a cash gift of $50,000 from his rich eccentric uncle. He wants to
set it aside to pay for his daughter Cynthias college education. Cynthia will begin college in 10
years and Dons financial advisor says that she can earn 7% interest on an investment in a
special college fund. How much will Don have in the fund when Cynthia begins college? (Enter
just the number without the $ sign or a comma; round to the nearest whole dollar.)
Answer for Question 5

Question 6
(10 points) Bridgettes grandparents opened a savings account for her and placed $500 in the
account. The account pays 3.5% interest. Bridgette wants to be a singer and she has her heart
set on a new karaoke machine. The machine costs $150. How much less will the account be
worth in 8 years if she buys the karaoke machine now versus leaving the account untouched?
(Enter just the number without the $ sign or a comma; round to the nearest whole dollar.)
Answer for Question 6

Question 7
(10 points) Joe is getting ready to buy a car. He has $20,000 in investments earning 4.9%
annually. The car also costs $20,000. If he doesnt pay cash for the car, Joe can get a loan at
2.9% interest for 5 years. The loan is structured so that Joe pays one balloon payment at the end
of 5 years. The balloon payment includes the principal plus all interest accrued over 5 years. If
Joe takes the loan will he have enough money available from his investments to make the
balloon payment? How much will he be short/have to spare?
Yes; 2082
Yes; 2331
Yes; 5404
No; 2331
No; 5404
No; 2082

Question 8
(15 points) Juan has $100,000 to invest and he has narrowed down his decision to two
investments. Option A returns 60% annually for 4 years, but the maximum investment he can
make is $10,000. Option B returns 12% annually for 4 years and would require the entire
$100,000. Which option produces the best result for Juan and what is the benefit over the lesser
option? Assume that the $90,000 not invested in Option A would be placed in a safe deposit box
earning no interest.
Option B; 1816
Option A; 1816
Option B; 9532
Option A; 19373
Option B; 19373
Option A; 9532

Question 9
(15 points) Jessica is in the market for a new car. She has narrowed her search down to 2
models. Model A costs $20,000 and Model B costs $18,000. With both cars she plans to pay
cash and own them for 5 years before trading in for a new car. Her research indicates that the
trade in value for Model A after 5 years is 50% of the initial purchase price. The trade in value for
Model B is 25%. Jessica has no emotional attachment to either model and wants to make a
strictly financial decision. The interest rate is 6%. For simplicity assume that operating and
maintenance costs for the models are identical every year. Which model is the better decision
and how much "cheaper" is it than the alternative?
Model A; 2000
Model B; 2000
Model A; 2110
Model B; 2365

Model B; 2110
Model A; 2365

Question 10
(15 points) Christine is a new homebuyer. She wants to make sure that she incorporates the cost
of maintenance into her decision. She estimates that routine repairs and maintenance on the
home she is considering will be $1,590 in the first year (one year from now). Due to the
increasing age of the home, she expects that maintenance costs will increase 6% annually. The
interest rate is 5%. If she plans to be in the home for 10 years, what is the present value of all
future maintenance? (Note that maintenance costs will change annually, and starts one year from
now and she plans to do the last one before selling her house.)